Oil & Gas - Still Confident On Potential Contract Awards

4QCY12 will largely be dominated by marginal field  awards and there should be even more contract awards next year in 2013 given the delay in projects in the sector thus far. The upcoming General Elections could result in temporary share price weaknesses as historically, the sector generally underperforms the KLCI before and after a General Election. Notwithstanding this, we believe that any retracements in share prices will be a good opportunity for investors to accumulate stocks as 2013 onwards will be bullish years for the sector as Petronas continues its aggressive capex spending to address the dwindling reserve concerns. As such, we are maintaining our OVERWEIGHT rating on the sector with SapuraKencana (OP; TP: RM2.80) remaining as our Top Pick for its  significant scale and global reach that make it a favourite in any contract tenders. 

The past: An unexciting quarter.  The oil and gas segment turned in an unsurprising performance during the 2QCY12 results season with most (7 out of 9) of the companies under our coverage coming largely-within our expectations. In 3QCY12, contract awards were relatively lackluster (versus 2QCY12), and marginal field awards were also sparse. Only the Kapal, Banang and Meranti (KBM) clusters were awarded to Thai-based Coastal Energy in July-12. Given the unexciting quarter; share price performances of local oil and gas stocks have largely been in line or underperformed the FBMKLCI. This is saved for selective stocks that rose due more to their stock-specific circumstances (e.g. speculation of marginal field wins or corporate exercises). 

The present: 4QCY12 outlook.  We foresee the final quarter of 2012 to be largely dominated by marginal field awards. Just last week, it was finally announced that Petra Energy would be the local equity partner for the KBM cluster with a 30% stake. For the remaining marginal fields, unsurprising notables like SapuraKencana, Dialog (OP; TP: RM2.79) and Bumi Armada (NOT RATED) are our pick of likely candidates. In regard to smaller players, they could be the likes of Scomi Group (NOT RATED) and Daya Materials (NOT RATED). Uzma (OP; TP: RM2.04) has mentioned that it is also bidding for a marginal field. In terms of contract awards, the Malikai fabrication should be awarded soon where MMHE in JV with Technip are likely to be the winners. Meanwhile, the other remaining headline projects should be awarded in 2013. Candidates for the RM7b-RM10b Pan Malaysia hook-up and commissioning project could see contract awards from end-4QCY12 to 1QCY13, whilst it could also be an opportune time to re-look at OSV stocks given that we foresee increasing charter rates and charter contracts awards from 4QCY12 onwards.

The future: positioning for 2013.  Despite having been in the news since 1H2012, we gather that a number of these domestic projects will only be awarded in 2013. Fabrication projects would include the likes of Dulang, Samarang and Bokor. The first CEOR project awarded will likely be the Angsi project. The Belud FPSO is expected to be the next domestic floating project in the near term. 

Risks. Historically, oil & gas stocks saw share price weaknesses before and after the General Elections. Should the same trend repeat itself for  this General Election, we believe it will actually present a good opportunity for investors to accumulate oil and gas stocks as we expect 2013 and onwards to be vibrant years for the sector. Another risk is that delays in contract rollouts could tank investor sentiment for these stocks. However, we believe that Petronas’ acknowledgement of the dwindling domestic production in its latest results review indicates that capex spending for new fields and field rejuvenation will be urgently needed. 

Maintain OVERWEIGHT.  Our continued confidence is premised on Petronas’ likely aggressive spending to address the domestic reserve replenishment concerns. SapuraKencana is still our Top Pick for its significant scale, global reach and track record that will make it a favourite in any contract bids. We also have OUTPERFORM calls on Yinson Holdings (OP; TP: RM2.68), Alam Maritim (OP; TP: RM1.14), Coastal Contracts (OP; TP: RM2.53), Dialog (OP: RM2.79), Gas Malaysia (OP; TP: RM2.94), Petronas Chemicals (OP; TP: RM7.46), Seremban Engineering (OP; TP: RM0.59), Uzma (OP; TP: RM2.04) and Wah Seong (OP; TP: RM2.23).

Source: Kenanga